Elastic vs Inelastic Demand: Why do traders need to understand this?

The reality behind prices

Have you ever stopped to think about why some things, when their prices go up, people continue to buy them the same way, while other products see a drop in sales? It all has to do with elasticity. At its core, it's a fancy term to describe how much people change their behavior when prices change.

Understanding Elastic and Inelastic Demand

The situation is simple: elastic demand is when consumers are very sensitive to price changes. If you raise the price, people abandon the product and start looking for cheaper alternatives. This is the case with luxury items – no one really needs a gold watch when the price becomes outrageous.

Inelastic demand is the opposite. People keep buying regardless of the price because the need is real. Gasoline is the best example: you need it to drive, so even if the price goes up, most people will not simply stop using their car.

How does it work in practice?

Price elasticity works like this: when it is greater than 1.0, it means that demand is very responsive to price movements (elastic). When it is below 1.0, demand is less sensitive (inelastic). And when it hits 1.0? Then the percentage change in price is equal to the percentage change in demand.

There are other types as well: supply elasticity measures how producers respond to variations, income elasticity shows how demand changes with people's income, and cross elasticity analyzes how changes in one product affect another.

The trading side of all this

For traders, understanding elastic and inelastic demand is pure gold. When an asset has elastic demand, traders can take advantage of rapid price fluctuations with momentum strategies. That's where the arbitrage opportunity lies – you profit from the swings.

When the supply is inelastic (few available assets), it indicates that it is worth accumulating for the long term. Some altcoins with a limited supply work this way.

Elasticity outside of trading

The concept is not limited to economics. Engineers use material elasticity to construct safe structures - how materials respond to pressure and deformation. In medicine, understanding skin elasticity is crucial for effective treatments.

In environmental science, the elasticity of ecosystems helps researchers predict how they respond to climate changes or habitat loss. It is much broader than it seems.

The conclusion

Elasticity is basically the science of how everything responds to changes. Whether in trading, in the economy, or in real life, the concept shows patterns that repeat. Those who understand these patterns make better decisions. And in trading, a better decision means better potential profit.